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Operating risk assessment for underground metal mining systems: Overview

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Article  in  International Journal of Mining and Mineral Engineering · January 2013

DOI: 10.1504/IJMME.2013.053167

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Int. J. Mining and Mineral Engineering, Vol. 4, No. 3, 2013 175

Operating risk assessment for underground metal

mining systems: overview and discussion

Serguei A. Kenzap*
and Vassilios N. Kazakidis
School of Engineering,
Laurentian University,
Sudbury, P3E 2C6 Ontario, Canada
E-mail: sx_kenzap@laurentian.ca
E-mail: VKazakidis@laurentian.ca
*Corresponding author

Abstract: This paper provides an overview and discussion of important aspects

of risk analysis that are relevant to underground metal mines operating risks
assessment and the impact on mining project economics, using stochastic
computer modelling, in Discounted Cash Flow (DCF) analysis. Mine operating
risk assessment is presented in an overview of available risks evaluation tools
that have been developed in other than mining engineering disciplines. Links
are established between the decision-making process for mine design
alternatives evaluation and the risk based mine planning process, with emphasis
to the need of introduction of quality and flexibility in mine design process.
Finally, challenges of risk-based mine planning and design implementation are
discussed and the call for a systems risk-optimisation analysis approach is
made.

Keywords: operating risk assessment; subjective probabilities; underground

mining systems; DCF analysis; Monte Carlo simulation; flexibility; real options
in projects; mine planning; expert-based decision-making systems.

Reference to this paper should be made as follows: Kenzap, S.A. and

Kazakidis, V.N. (2013) ‘Operating risk assessment for underground metal
mining systems: overview and discussion’, Int. J. Mining and Mineral
Engineering, Vol. 4, No. 3, pp.175–200.

Biographical notes: Serguei A. Kenzap, MASc, PEng is a Mining Engineer at

Sifto Canada Corp. A Compass Minerals Company. He is a Graduate of the
Laurentian University with a graduate degree in Mining and Mineral Resources
Engineering (MASc), and an undergraduate degree from the Norilsk Industrial
Institute, Russian Federation, in Mining Engineering (BEng). He is a Mining
Engineer with 15 years of experience that include operations, contracting, and
consulting. He has specialist technical expertise in areas that include valuation
of mining operations, mining project options selection and decision making,
mining methods selection and techno-economic comparison, mine
optimisation, mine planning/design and scheduling, mine capital and operating
cost estimation, and mining equipment selection. In recent years, he was
involved in a variety of engineering and feasibility studies that include
domestic and international projects.

Copyright © 2013 Inderscience Enterprises Ltd.

176 S.A. Kenzap and V.N. Kazakidis

Vassilios N. Kazakidis, PhD, PEng, is an Associate Professor in Mining

Engineering at Laurentian University. He has been with the School of
Engineering in Sudbury, Ontario since 2001 and was consulting to the mining
industry before that. He has his first degree from NTUA in Greece, a MASc
from Queen’s University (1990) and a PhD from the University of British
Columbia (2001), all in mining engineering. He teaches in the areas of mineral
project valuation, underground mining methods, risk management and
engineering economics. His research includes production system analysis,
flexible mining systems, economic impact of operating problems, and the
impact of mining community relations on feasibility studies. Consulting and
industrial research assignments in Canada and overseas include underground
mine design, mining geomechanics, production system analysis, production
simulation, economic impact of ground-related problems, and the impact of
communities on feasibility studies. He has over 100 journal, conference
publications and professional reports.

1 Introduction

Risk assessment and management are vital to the design of underground mining
operations and the optimisation of planning in development and production cycles. While
market and geological risks can be assessed through a forecasting analysis based on
historical and orebody data respectively, operating risk assessment in the mining industry
requires a customised approach to the project that combines qualitative and quantitative
assessment by qualified personnel.
Considering the uniqueness of each underground mine, the expert judgement is often
the only one source of information that is available to assess risks. In addition, the
existing data sets could be incomplete and, therefore, expert opinion is required to fill the
gaps of statistical analysis, or use his or her analysis expertise and engineering
judgement. There is an increasing need to use methods and techniques that are able to
handle subjective, qualitative measures and to combine them with quantitative stochastic
modelling in order to evaluate the impact of mine operations related issues on Discounted
Cash Flow (DCF) economic performance parameters.
The present paper provides an overview and a discussion of operating risk analysis in
general, but with a view point to the special problems arising in underground metal mine
design. Emphasis is given to the need of establishing an expert judgement-based
methodology that allows to assess mine operating risk, by considering subjective and
objective probabilities, in decision theory and stochastic cash flow modelling. Once the
operating risk is defined and risk assessment methods are discussed, a methodology for
operating risk cash flow analysis is contemplated.

2 The definition of operating risk

2.1 Operating risk for feasibility studies and operations

Risk is best defined as the potential to suffer a loss. Risks can impact the revenue and
capital and operating cost streamlines of project cash flows, affecting the projects
profitability as part of a feasibility assessment (Frew, 1990; Hancock, 1990; Prentice,
 Operating risk assessment for underground metal mining systems 177

1990; Oraee et al., 2011; Mackenzie and Cusworth, 2007). Weiss (1997) delineates three
types of risk that can impact the overall success of an industrial ventures:
• risk to the health and safety of workers
• risk to the environment
• risk to activity.
In the context of underground mines, activity risks can include damage to equipment and
infrastructure, loss of output tonnages, time loss and cost increase due to delays in
rehabilitation and scheduling (Kenzap and Kazakidis, 2011a). These risks are
components of an entire mining system that has stochastic nature, where, unlike in
manufacturing, causality is loose. The subjective nature of underground mining systems
is mainly due to lack of numerical data, site uniqueness, mining system complexity,
interrelationship of risk factors and their cumulative effect on mining system economics.
All these, create a complexity in the valuation and management of operating risk in
underground mines.
Assessment of the risk is a vital part of a feasibility study to examine a project’s
viability. Such analysis can include a systematic use of available information to
determine the frequency of specified events and their consequence.
The estimated risk discussed in this paper is considered as the product of probability
of its occurrence (likelihood – L) and negative impact (consequence – C) at time (t),
as shown in equation (1).
General risk equation: R(t ) = L(t ) × C (t ). (1)

Traditionally, risk assessment that affects the cash flow structure has been conducted
through sensitivity analyses, where the variability from a base case is examined, or
through an examination of ‘what if’ scenarios for prioritisation of considered alternatives.
An extensive review of risk assessment and management in the mining industry is given
by NSW Department of Primary Industries (1997), while risk assessment in mine
feasibility studies is discussed by Johnson and McCarthy (2001) and Summers (2000).
Stochastic modelling, introduced to the mining industry by O’Hara (1982), has only
been sparsely applied in mine feasibilities as a result of limited availability of data or
expertise. The multidiscipline nature of mine feasibility provides the opportunity to
incorporate applicable risk analyses using Monte-Carlo simulation from science,
engineering or management. Risk and reliability approaches that exist in other industries
(e.g., petroleum, geotechnical, geological, manufacturing, environmental, business,
occupational health and safety) can provide input elements to a stochastic assessment
of operating risk for project evaluation in mine feasibility studies. However, the
derivation of relative risk, reliability or risk hazard assessments, do not necessarily
enable their direct incorporation to a cash flow analysis. An additional challenge
is the derivation of input data that can facilitate the quantification of the likelihood and
impact of operating problems for input in a cash flow analysis. Once this assessment is
achieved, future scenarios can be examined through a simulation analysis. With the
robustness of the recommendation of a feasibility study being dependent on the
forecasted variability of the assumptions, risk analysis becomes instrumental for risk-
informed decision making.
178 S.A. Kenzap and V.N. Kazakidis

The assessment of operating risk in mining project for input to process simulation and
production planning has been contemplated by Kazakidis and Scoble (2002) and
Kazakidis and Dessureault (2004) for the case of ground problems in underground mines.
Equipment reliability studies are established to evaluate the risk related to the
performance of mining equipment (Kumar and Granholm, 1988) and excavations
(Vagenas et al., 2003). Mine scheduling can be affected by resource parameters (Smith
and Dimitrakopoulos, 1999; Dimitrakopoulos and Grieco, 2009), which in turn can
impact the operating risk assumptions made in a feasibility study. Both revenue and costs
can be affected by the risk posed by operating problems through deviations from
benchmarked performances in time, cost and revenue. Operating delays is the result of
underperformance in system components during the development (preproduction) or the
production cycles of a mine.
The impact of operating problems in underground mines is demonstrated through
numerous case studies (e.g., Horsley and Medhurst, 2000; Corkram et al., 2003;
Mercier-Lengevin and Turvotte, 2006) that involve ground, equipment, or scheduling
problems. Once operating risk has been quantified, it can be used as input to cash flow or
process simulation. The outcome can provide the means to evaluate risk in mine
feasibility studies and evaluate mine design and planning alternatives. The impact of
uncertainty in underground planning and design of mining systems and the assessment of
measures to counter it, are discusses by Kazakidis and Mayer (2010).

2.2 Risk and hazard identification

Risk identification is the first and most critical step in a complete risk analysis. Risks
relative to a standard scale or categorisation against alternative scenarios need to be
performed based on forecasting possible events or ranges of project variables that impact
the project viability and its economic feasibility. Faber and Stewart (2003) have
described this process as potential hazards identification. This process aims to identify all
the potential sources of risk that will be taken into account in further analysis.
De Neufville and Scholtes (2011) indicate the importance of recognising the major
uncertainties that a project is likely to encounter. Ang (2011) classifies uncertainty as
aleatory (associated with natural randomness of data) and epistemic (due to insufficient
knowledge). According to NSW Department of Primary Industries (1997), a number of
techniques are available for risk identification, but none of them can be expected to
capture all the risk components. Thereafter, an appropriate time needs to be allowed for
risk determination. The same author listed the following methods of risk identification:
• Action Error Analysis (AEA)
• Failure Mode and Effects Analysis (FMEA)
• Failure Mode and Effects Criticality Analysis (FMECA)
• Fault Tree Analysis (FTA)
• Hazard and Operability Studies (HAZOP):
• Machinery Hazard Identification (MHI)
• Potential Human Error Identification (PHEI)
 Operating risk assessment for underground metal mining systems 179

• Rapid Ranking
• Workplace Risk Assessment and Control (WRAC)
• What-If Analysis
• Risk Matrix prioritisation.
Although there are several methods available for identifying risks, there is no single
technique that is exclusively applicable to a particular situation (Faber and Stewart,
2003). Moreover, the uniqueness of each mine site in terms of geological condition and
locality require specialised design and evaluation of the risk, in addition to the
determination of external project risk factors. Furthermore, due to the multidiscipline
nature of operating risks, a team approach with a range of experience and expertise, needs
to be employed at the risk identification phase. The brainstorming exercise leads to a
tabulated operating risk matrix that is used during the evaluation phase of risk assessment
(NSW Department of Primary Industries, 1997). These risk matrices serve as input to risk
modelling.

2.3 Operating risk modelling

Risk evaluation is the next step in risk analysis. Although there are non-monetary risks in
a project related to the health and safety of personnel, as well as those associated with the
likelihood of catastrophic events, the risk analysis discussed herein refers to quantifiable
monetary risks related to operating conditions. Research performed by Tixier et al. (2002)
identified more than 60 risk analysis methodologies of industrial plants that can be
applied at the risk evaluation phase to quantify risk impact deterministically and
probabilistically.
A deterministic, or single-point risk evaluation involves a lone estimate of variables
in order to determine different scenarios outputs related to system performance. This
approach often is called as ‘what if’ scenarios modelling to evaluate time considerations
of eventualities. This approach is time consuming when a large number of possible
scenarios is considered. Moreover, the probability of occurrence of a scenario remains
unknown. Consequently, the method has the evitable difficulty to forecast representative
single values of performance as opposed to forecasting distribution of uncertainties.
In contrast, probabilistic methods are based on consideration of probability of
occurrence and consequence distribution of risk events. Computer-aided modelling
allows to perform stochastic risk simulation through random sampling and determine an
outcome’s frequency with certain level of confidence. Quantitative risk analysis using
Monte Carlo (MC) simulation allows the consideration of possible scenarios by
effectively accounting for every randomly generated value that each variable could take
and weighting the probability of its occurrence. Model variables are represented by
probability distribution functions, when using stochastic risk analysis techniques. The
objective of quantitative probabilistic risk analysis is to model the combined impact of
uncertainty of operating risks in model’s parameters in order to determine a probability
distribution of the forecasted risk model outcome.
Qualitative or quantitative input data can both be used as input to risk simulation.
Qualitative data relates to descriptions that can be observed, but not measured.
Quantitative or numerical data can be measured and statistics evaluation techniques can
180 S.A. Kenzap and V.N. Kazakidis

be applied to modelling (Figure 1). The assessment of impact is a fundamental part in risk
assessment for valuation and optimisation purposes.

Figure 1 Concept of risk analysis with qualitative and quantitative factors (see online version
for colours)

2.4 Risk impact assessment and optimisation

Mine planning and design of underground metal mines requires consideration of
operating risks and probabilistic nature of mining operation performance. Risk-based
mine planning and design process involves iterative steps of engineering evaluation and it
is an inevitable prerequisite for mining engineers to deal with incomplete or uncertain
data sets that represent geological, mine production and market forecasts. Moreover, due
to multistep approach in mining project evaluation process, every predecessor phase of
the study delivers important decisions to the management team in terms of proceeding or
not to the next phase of the study. This indicates the need to establish a well-developed
methodology, that allows to assess mine planning and design alternatives through
integrated economic evaluation of Run of Mine (RoM) ore quality, throughput tonnage,
mine operating risks and uncertainties. This provides a basis for optimising the entire
chain of a holistic technological process that includes underground mine access,
development, mining methods, production sequence, ore quality management, and
processing into metal concentrate. This will allow establishing a link between
underground operating risk and RoM and their impact on metal concentrate considering
economic factors like the Net Present Value (NPV). The evaluation process should
consider the mine/mill integrated complex as a part of the overall business enterprise.
Optimisation of projects under risk and uncertainty is well developed in management,
finance and petroleum industries (Peralta and Kalwij, 2012). Parameterised optimisation
principle with efficient frontier is widely used in investment portfolio management
(Walls, 2004; Savage, 2003). This method allows to evaluate possible investment
opportunities, considering expected return and a forecasted risk. Depending on the
decision maker’s willingness to trade higher risk for a higher return, a value at any point
on the efficiency frontier might be selected. This approach allows excluding scenarios
that are out of a desired range, based on project risk boundaries, so narrowing down the
number of alternatives for optimising decision making (Figure 2).
 Operating risk assessment for underground metal mining systems 181

Figure 2 Parameterised optimisation principle

Source: Adopted after Savage (2003)

This optimisation technique finds application in project management science and

petroleum industry, but not in mining project evaluation process. One reason of this is the
difficulty to establish links between geological, mining, and processing data in a
techno-economic evaluation through a stochastic model with risk consideration for
evaluating the broad range of possible design scenarios. The evaluation options should be
realistic and take into account the physical constraints that an underground mining
operation can face. Another cause is the significant difference between the type of natural
resources extraction, when comparing continuous flow oil and gas to underground metal
mining batching operation. According to Rudenno (2009), the main characteristics of oil
and gas production are the hydrocarbon reservoir pressure and its flow rate. It is
important for sustainable future production to have a good driving force behind the
reservoir that will ensure continual flow of resources over the life-cycle of the operation.
All these describe oil and gas production as a continuous operation. In contrast,
underground metal mining is a batch type of process. Production batches of mining
stopes are mined at a planned sequence that is constrained by spatially variable
geological and geomechanical conditions. These differences significantly reduce the
number of viable alternatives when evaluating risks in production choices for
underground metal mining systems. In the next section, the assessment of operating risk
in underground mines will be discussed.

3 Mine operating risk forecasting

3.1 Underground metal mines risk classification

The classification can be organised by keeping in perspective the mine planning/design
needs and constraints, as well as the potential economic impact that operating problems
can have on an underground system. Safety-related risks are not considered as part of the
economic valuation of operating risk. The sources of capital and operating cost changes
and time delays can be tabulated to enable the hierarchisation of potentially hazardous
unplanned events during the project’s life cycle. Initial capital infrastructure costs are
determined at the feasibility stage for the considered mining operation. These costs will
182 S.A. Kenzap and V.N. Kazakidis

affect the risk and the measures available to counter it or exploit the changes in
conditions during the lifecycle of the considered operation.
According to Kazakidis and Scoble (2002), Kazakidis and Dessureault (2004),
Vayenas et al. (2003), Kenzap and Kazakidis (2011b), project-dependent operating risk
factors can be classified, based on categorisation of the factors and their impact, in three
groups, as shown in Figure 3, as follows:
1 Mining equipment related issues:
• Project OPEX (operating expenditure) and sustaining CAPEX (capital
expenditure) variability due to unplanned equipment maintenance and parts
supply delays
• Equipment availability variation during pre-production and production periods.
2 Mine plan related issues:
• Project duration deviation during pre-production and production periods for
operating risk reasons (other than those related to mineral resource uncertainty)
3 Geomechanics related issues:
• Project OPEX and CAPEX variability, due to extra work, and equipment loss
because of geomechanical issues during pre-production and production periods
• Time impact due to geomechanical issues during pre-production and production
periods; mining recovery and dilution variation due to geomechanical issues.
In underground mining, the orebody is accessed through underground openings
(e.g., shafts, inclines, ramps, drifts) in order to haul and hoist the ore to surface.
In contrast, surface mining utilises open pits to extract economically viable deposits.
A successful open pit mine operation is highly dependent on the reliability of mining
equipment. Therefore, the emphasis needs to be paid to mining equipment when
assessing the operating risk of open pit mines. Operating risks that relate to geomechanics
and scheduling in open pit are commonly not as critical and complex as the case of
underground mining operations. This is mainly due to flexibility to extract ore at a greater
number of production phases as compared to underground mining.

Figure 3 Classification of mine operating risk factors with impacts that affect project economics
 Operating risk assessment for underground metal mining systems 183

3.2 Relative risk: importance

Mining project risks analysis is based on identification of risk events, assessment of their
likelihood, relative importance and bottom-line economic consequences of a mining
project. Such of analysis is instrumental for decision makers that help to identify
consequences of risk events and their economic impact. There are number of risks
that jeopardise mining projects with each risk having different relative severity. A CIM
Marketing Excellence Survey (MES) survey (Smith, 2002) identified 20 general types of
risk that can impact on project profitability, as indicated in Figure 4.
The severity of risks can be different as they depend on the geographic location of a
mining project. A comprehensive sensitivity analysis on risks is required in order to
determine the importance of risks for each particular project and determine appropriate
risk mitigation strategy.

Figure 4 Principal mining project risks ranking

Source: Adopted after Smith (2002)

Several researchers identified categories of risks that can affect a mining project
(Bhattacharya, 2010; Schafrik and Kazakidis, 2011). They indicated the following
risk categories: mineral, sponsors, project completion, operation, market, sovereign,
political/regulatory, currency, and social. Mine operating risk factors identified in this
paper affect the mineral, project completion, and operation risk categories.
With the identified categories having lots in common, the grouping of mining project
risks follows the corporate attitude for aversion or appetite for risk. In order to adopt a
uniform mining project risks classification, it is possible to classify risk factors based on
their fitting to the mining project economic class. These classes can be categorised as
macroeconomic and microeconomic. Macroeconomic risk factors are those that drive
project economics as a whole (e.g., political, social, geological resources, technology,
financing cost, etc.). In contrast, microeconomic risk factors include project financing,
project completion, productivity, capital and operating costs, mineral resource recovery,
metal price forecast etc.
184 S.A. Kenzap and V.N. Kazakidis

In the contents of this paper, mine operating risks belong to microeconomic group of
risks and are associated with planning and operating a mining enterprise and its
forecasted economic performance. The methods for operating risk assessment will be
discussed next.

3.3 Existing mine operating risk assessment methods

Economic risk, as opposed to health and safety risk, commonly use DCF evaluation
methods to quantify risk impact on project economics and identify the likelihood of
having the NPV of a project below zero (Smith, 2002). When evaluating mine operating
risks, quantitative assessment techniques did not find a widespread application due to
difficulties related to obtaining the required quantitative data for the analysis. Qualitative
mine operating risks assessment techniques are commonly used in this industry due to its
relative simplicity (Roy, 2003; NSW Government Industry and Investments, 2009;
Iannacchione et al., 2012; BHP Billiton, 2007; Allanson, 2002). In qualitative operating
risk assessment, hazard factors are identified and rated from ‘low’ to ‘high’ with assigned
values. Then, the overall risk is calculated by taking the weighted average of risk factors.
This overall risk integer value is converted back to rating from ‘low’ to ‘high’ and based
on company policy decision is made for adopting the appropriate risk mitigation strategy
(Vose, 2008; NSW Department of Primary Industries, 1997).
According to Segudovic (2007), qualitative risk assessment approaches can produce
unreliable and inadequate results due to the subjective nature of the analysis and the lack
of reliable techniques to quantify subjectively estimated parameters. Walls (2004) points
out that in the context of a decision, subjective estimates are better than ignoring
uncertainty. These, lead to necessity of risk evaluation using more than one qualitative
risk assessment method and then compare the results in order to determine the overall
consensus of risk assessment.
Quantitative risk assessment techniques with evaluation of risks influence on project
cash flow is well applied in mining industry and described by a number of authors around
the globe (Mackenzie, 1969; Gamble, 2007; Tolmay, 2009). This can be done using one
of three common methods:
• three points estimation method
• discrete probability method
• stochastic modelling (e.g., Monte Carlo simulation).
The three points estimation risk assessment method is less time intensive, but the least
accurate. Two scenarios are evaluated with this method: base case and risks loaded
project (business) alternatives. NPV is determined for most likely, pessimistic and
optimistic variables in DCF model. Then, NPV values are plotted and a probability of
NPV below or equal zero is determined from the graph. Figure 5 shows the concept for
two design scenarios.
In discrete probability risk assessment method, all expected project outcome values
(e.g., NPV) are recalculated and a probability histogram is plotted in order to determine
the likelihood of having NPV below or equal zero. The discrete values of variables and
their probabilities are subjectively determined or obtained from historical data. For
example, project capital costs and their probabilities can be determined as $X1: P1(10%);
$X2: P1(50%); $X3: P1(75%); $X4: P1(20%). The same principle applies for all the other
 Operating risk assessment for underground metal mining systems 185

variables determined for risk evaluation. The number of scenarios in this method depends
on number of variables and their possible values. This method is very time intensive
if higher level of accuracy is required as this will increase a number of recalculated
scenarios. Moreover, it does not account for correlation between risk factors that
significantly affect the accuracy of the overall risk evaluation Figure 6 shows the
principle after all the possible scenarios are plotted for a base case and for an alternative
design. In the base case, the chance the project’s NPV to be below zero are about 45%.
In the alternative design scenario the chance is about 90%.

Figure 5 Three point risk assessment concept (see online version for colours)

Figure 6 Discrete probability assessment (indicated points represent likelihood of NPV = 0)

The Monte Carlo simulation risk assessment approach belongs to stochastic risk
evaluation techniques and has become a popular tool for quantitative risk assessment that
allows the calculation of distributions of considered future outcomes. This method can be
applied to a deterministic DCF model by applying a symmetric probability density
186 S.A. Kenzap and V.N. Kazakidis

functions to identified risk variables. The correlation between input variables can be
considered using standard statistical techniques. NPV risk distribution histograms or
cumulative NPV risk curves can be used after the completion of simulation runs in order
to determine the likelihood of having negative NPV in a mining project (Figure 7).
Although this method is very effective and productive, it should take into account: the
application of proper stochastic DCF modelling techniques, the lack of quantitative input
data, the Central Limit Theorem (CLT) limitation, and the weighting of risk factors
(Kenzap and Kazakidis, 2011b). The subjectiviy in the assessment of risk is frequently
the only available alternative in lieu of available objective quantitative data, relevant to
the particular operation. This concept is discussed next.

Figure 7 Illustrative example of stochastic modelling for mining project NPV

4 Application of subjective probabilities for risk assessment

4.1 Why to use subjective probabilities

Whether a qualitative or quantitative analysis is conducted, it is often the case that
the probability of a certain project parameter value needs to be forecasted using
objective or subjective probabilities (Figure 1). Objective probabilities can be estimated
when actual information is available for the parameter concerned (costs, grade, tonnage
and dimensions of a mineralised body, etc.). Subjective probabilities are based on
opinions of individuals possessing professional expertise, knowledge, and can be the
basis for analysis when limited information is available. The expert can apply
analytical tools that he or she chooses in order to express his or her opinion in the form of
high risk, low strength, high impact, etc. This forms the basis to express risk in
quantitative terms.
 Operating risk assessment for underground metal mining systems 187

According to Vose (2008), the reasons of impossibility to obtain all the data required
for accurate determination the uncertainty of all variables, are as follows:
• The data have never been collected.
• The data are too expensive to obtain.
• Past data are not considered relevant for the particular application.
• The data is incomplete and requires experts’ involvement to be finalised. All the
cases described above will require use of internal or external company experts in
order to assess individual variable components of a risk evaluation model.

4.2 Evaluation of subjective probabilities

The evaluation process of mine operating risks requires the analysis of conditions where
limited data are available. A key techniques to create a good risk model and to avoid
black box solutions are simplicity and disaggregation of the problem in logical
components sufficiently enough so that the expert can concentrate on estimating
something that is straightforward to predict (Vose, 2008). For example, if the NPV of a
project cash flow is considered as the main decision-making criterion, it will generally be
more beneficial to break down the mineral project NPV calculations into single cash
inflow components (e.g., revenue, operating cost, capital cost, taxes, etc.), rather than to
estimate the total NPV using all-inclusive formulae. Disaggregation allows the expert and
analyst to identify dependencies between components. The key uncertainties and their
weights are determined during the disaggregation process, when building simulation
modules.
Once the model has been sufficiently disaggregated, probability distributions of
operating risks impact and likelihood of risks occurrence should be assigned by experts
after conducting their analysis. In risk modelling, there are several probability
distributions that are used to model expert opinion, namely: uniform, triangular, pert,
general, cumulative, discrete, and Bernoulli (note: the distribution names are given as per
Crystal Ball software setup). Experts can use Event Tree Analysis (ETA) in order to
determine subjective probabilities of operating risk events, based on their individual
analysis and judgement. The concept of ETA is shown in Figure 8 (Ericson, 1999).

Figure 8 ETA concept

Source: After Ericson (1999)

188 S.A. Kenzap and V.N. Kazakidis

Once subjective probability is determined using ETA analysis, this can be linked to a
discrete probability distribution for stochastic modelling. In order to produce realistic
subjective probability distribution function, several experts are called for the evaluation
and their results need to be combined in one probability distribution that represents the
breadth in expert opinions. To do that, a dynamic referencing with combination of
custom build probability distributions can be used in a risk stochastic model.
This technique will allow eliminating the negative effect of the Central Limit
Theorem when combining several subjective probability distributions (Kenzap and
Kazakidis, 2011c).
There are several criteria that need to be considered when selecting and weighting
expert opinions for determining subjective probability distribution. Expert selection
criteria can include and not limited to: years of professional experience, education,
subject matter expertise, impartiality and objectivity in judgement, reputation and
standing in the profession, willingness and availability to act as an expert, locality of the
expert, and more. This problem belongs to Multi Criteria decision-making methods.
According to Fraser et al. (2000), the Analytic Hierarchy Process (AHP) is an established
Multi Criteria decision-making method and can be used in the risk-DCF modelling to
weigh subjective probabilities evaluated by different experts (Kenzap and Kazakidis,
2010; Kazakidis et al., 2004). A methodology for integrating forecasted operating risk in
cash flow analysis is contemplated next.

5 Methodology for operating risk cash flow analysis

5.1 Operating risk assessment process

Stochastic risk modelling allows evaluating underground mine operating risk-related
problems in terms of the impact that these can have on the overall mining project.
A risk-based decision-making methodology allows investigation of possible mining
projects investment scenarios considering expected return and risks. This enables the
evaluation of mine plan quality alternatives and the assessment of the value of
introducing design flexibility, in the form of real options in projects (De Neufville and
Scholtes, 2011), to the mine planning process (Figure 9).
In this decision-making process, flexibility is defined as the ability of mine design to
adjust to forecasted uncertainties that can affect a mine plan. Quality is a function of
ROM ore quality and performance of a mining operation.
This process allows for integrated evaluation of underground mining scenarios
with consideration of mitigation strategies, mine design flexibility and ore and process
quality.

5.2 Operating risk impact evaluation

The assessment of operating risk impact on project economics using Monte Carlo
simulation allows investigating all the possible aspects of risk factors and prioritising
their criticality in a mining setting. Figure 10 demonstrates the output of a Crystal BallTM
simulation (Kenzap and Kazakidis, 2011a) in terms of the NPV change, relative to the
base case, at the beginning of mine development period, if to consider different mine
operating issues in risk analysis. It allows separating the three operating categories
 Operating risk assessment for underground metal mining systems 189

(equipment, schedule, ground-related problems) in the simulation and investigating their

impact on the financial indicator (NPV).

Figure 9 Integrated decision-making process for risk-based mine planning and design

Figure 10 Simulated operations related delays impact chart using M-C simulation

Source: Kenzap and Kazakidis (2011a)

190 S.A. Kenzap and V.N. Kazakidis

Stochastic modelling enables to demonstrate the impact of operating issues on project

cash flow by indicating cash flow fluctuations and extension of mine pre-production and
production periods (Figure 11).
The described risk evaluation and simulation approach provides quantification of
delays that drive operating risks. The input of simulation can be based on combination of
subjective expert opinion, in lieu of objective estimates. The risk drivers related to
operating delays pertaining to equipment, scheduling or ground-problems can be
incorporated in DCF models on equal terms with market-related risks (e.g., metal prices,
exchange rates, etc.) as correlated or independent variables for the assessment of
alternatives and their impact on bottom-line economic parameters, as part of the
risk-informed decision-making process for the optimisation of a mining system. This
provides a basis for the evaluation of risk mitigation alternatives in mine design.

Figure 11 Example of simulated after tax cash annual flow

Source: Kenzap and Kazakidis (2011b)

6 Operating risk amelioration as derivative of engineering disciplines

Considering the uniqueness of each underground mine, the expert opinion is very often
the primary source of information that is available to assess risks. Experts can assess
individual variable components of a risk model. For example, in order to assess risk of
pillar failure and its effect on ore production disruption, an expert in geomechanics can
use ground conditions related data and apply systems reliability theory to quantify pillar
failure risk in terms of production delay time and cost impact that in turn, will be used in
an economic model input to determine risk impacts on a mining system. Once the model
has been sufficiently disaggregated, probability distributions of operating risks impact
and likelihood of risks occurrence should be assigned by experts after conducting their
analysis. This section describes the principles of existing risk assessment techniques that
 Operating risk assessment for underground metal mining systems 191

are developed in reliability, quality and safety engineering. Also, the engineering design
flexibility concept and its relation to risk assessment and optimisation are discussed.

6.1 Reliability engineering and risk

Technical systems reliability engineering provides means to perform a system reliability
quantitative analysis that takes into account statistical equipment failure data and its
derivatives: Mean Time Between Failures (MTBF), Mean Time To Failure (MTTR) and
failure or hazard rate. This allows to compute a system’s reliability in the form of
probability that an equipment will perform without failure for an intended period of
operation; as well as its maintainability that refers to probability that the equipment’s
functionality will be restored to specified condition within given period of time, when the
maintenance action is performed (Vagenas et al., 1997; Modarres et al., 2010; Jardine,
2002). This approach allows organisations to create reliability-based equipment
maintenance policies and facilitates making decisions on equipment replacement,
inspections, overhaul/repair and more.
In reliability engineering, the typical hazard function of a device and its failure rate
are described by a ‘bathtub’ curve that has three different zones over the device useful
lifetime:
• start-up period, with failures due to defects in design, manufacturing, or construction
• normal life period, with random failures
• wear-out period, with increasing failure rates.
Knowing at what stage of lifetime a technical system is operating, allows to derive
probability of system failure and its idle, or ineffective time in particular period of
operations.
Several researches use reliability and maintenance engineering principles in order to
examine mining systems performance reliability (Vagenas et al., 2003; Rubio et al., 2008;
Kumar and Granholm, 1988). From studies, the risk of mining system due to operating
problems can be derived as:
Risk equation from maintenance engineering: Risk(t ) = 1 − R(t ) (2)

where Risk(t) is the probability of mining system performance failure at time t, and R(t)
is system reliability to function without failure. Please notice that the consequence of
failure is not part of this risk equation.
Vagenas et al. (2003) and Rubio et al. (2008), propose to classify mining systems in
terms of sub-systems, operating in series and in parallel. This allows for reliability
probabilistic calculation using statistical failure data and fit probability density functions.
The method examines the negative impact of system failure, measuring it in lost
operating time. Time loss consequences can be converted to expected monetary values.
The method also allows to determine the likelihood of ground-related risk events through
the use of basic software and knowledge of statistic.
192 S.A. Kenzap and V.N. Kazakidis

6.2 Quality engineering and risk

Quality engineering provides a number of tools to quantify risks due to poor quality of
production process performance. Finding initial application in manufacturing
engineering, the tools include process capability and performance indices, six-sigma,
Taguchi’s Quality Loss Function (QLF) and more (Taguchi et al., 2005; Fuchs, 2005;
Kenzap, 2006). Monetary risks due to poor quality of a technological process can be
quantified using Internal Failure Cost (IFC) and External Failure Cost (EFC) processes,
as shown in Figure 12.
Economic impact of mining cycle poor quality in mining projects can be evaluated
using the following equations:
C2 − C1
Process Internal Failure Cost (Kenzap et al., 2007): IFC = , ($/hr) (3)
T
where
C2: Operating, maintenance, and materials costs with delays
C1: Operating, maintenance, and materials costs without delays
T: Delay time (hrs).
NPV2 − NPV1
Process External Failure Cost (Kenzap et al., 2007): EFC = , ($/hr) (4)
T
where
NPV2: Calculated for a project with higher development rate
NPV1: Calculated for a project with lower development rate
T: Total period of lost opportunity (hrs).
Research (Kenzap et al., 2007) indicated that about 95% of total failure cost in lateral
mine development process of a mine is due to External Failure Cost (EFC), or lost
opportunity to access and develop an ore zone for starting production earlier.
Taguchi’s QLF has direct link of the monetary loss to the process capability index:
A 2 A 1
QLF mathematical interpretation (after Taguchi et al., 2005): L = σ = , ($) (5)
∆ 02 9 C p2

where
L: The monetary loss
Cp: The process capability index
A: The cost of rework or delay, which includes operating, material, and capital cost
σ2: The mean squared deviation
∆0: The difference between the target value and the upper or lower tolerance limits.
The connection between QLF and the process capability index explains the difference
among considered alternatives from the economic or productivity viewpoints. Using
QLF, monetary expression can be made and risk loaded performances of different mine
development scenarios can be compared.
 Operating risk assessment for underground metal mining systems 193

In quality engineering, a concept of system failure risk prioritisation is described by

Krishnamoorthi and Krishnamoorthi (2012). The authors refer to Risk Priority Number
(RPN):
Risk prioritisation formula for quality engineering: RPN = S × O × D (6)

where
S: Risk severity
O: Risk occurrence
D: Risk detectability.

Figure 12 Components of the cost of poor quality

Source: Based on Juran and Godfrey (2000)

All the parameters of this equation are estimated in a scale from 1 to 10 that gives range
for RPN from 1 to 1000. The higher RPN number is estimated for a particular hazard, the
higher the risk is that the system failure will occur due to a particular cause.
Due to highly subjective nature of this method and its inaccuracy, it can be used at the
beginning stages of engineering design to perform a high level of system risk assessment
and prioritisation. Quality Engineering focuses on controlling the deviation from
benchmarked target values by providing a statistical analysis of input parameters and
examining alternatives that can impact the operating risk of a mining process and its
risk-based design.

6.3 Safety engineering and risk

Safety engineering examines reliability of complex technological systems in terms of
likelihood of hazardous events to happen and their possible negative monetary and
non-monetary consequences (Ang, 2011; Vanmarcke, 2011; Uddin, 2011; Frangopol and
Messervey, 2011; Modarres et al., 2010).
Modarres et al. (2010), propose two methods to analyse fire safety hazards in
mechanical systems: Probability Risk Assessment (PRA) and Accident Precursor
Analysis (APA). The approaches are fundamentally the same and APA is traditionally
used to validate results from PRA analysis. The approach uses a Fault Tree Analysis
194 S.A. Kenzap and V.N. Kazakidis

(FTA) that is similar to ETA discussed in Section 4.2. The probability of risk events are
assigned to tree branches that represent different risk scenarios. The consequences of
each risk scenario are estimated using analytical assessment methods. For example,
negative consequences caused by risk of fire in a mechanical system can be calculated
using fire heat released rate, exposure temperature and estimated time required to reach a
critical temperature that will cause fatalities or economic consequences (Modarres et al.,
2010). Multiplication of risk event frequency and consequence gives risk values for each
scenario. The summation of each individual risk allows to quantify total system risks
• possible annual fatality rate
• probability of economic loss for each design alternative.
In order to account for uncertainties that are associated with risk events frequencies and
their consequences, analytical probability distribution functions are applied to the risk
tree branches and three point uncertainty values associated with risks are calculated
afterwards that include mean risk, 5th percentile risk, and 95th percentile risk.
Both approaches are based on probabilistic risk event tree analyses with time
intensive analytical calculations that allow the evaluation of safety risk evaluation under
uncertain risk values (Rajaram et al., 2005; Steffen et al., 2008). Risk sensitivity analysis
should be applied to prioritise risk effects importance as well as system-specific data of
failure probabilities. This also requires the collection of data pertinent to process hazards.
In the case of natural hazards (e.g., earthquakes, tsunami, tornadoes, etc.), the design
of infrastructure facilities must account for safety factors that combine fatality, injury,
and economic risks (Ang, 2011). The author describes the use of Monte Carlo simulation
in a quantitative risk assessment approach that allows to determine probabilities of
economic losses and fatality/injury rates due to natural hazards. The methodology allows
to determine an optimal infrastructure design parameters minimising expected
infrastructure facility Life-Cycle Cost (LCC), which is simulated as follows:
Life-cycle infrastructure facility cost optimisation principle
(adopted after Ang, 2011): (7)
Minimise LCC = C (i ) + P (h) × U (h) × C ( x)

where
C(i): Initial construction cost of facility
P(h): Probability of natural hazard
U(h): Uncertainty due to lack of knowledge of the hazardous event
C(x): Probability density function of economic loss due to natural hazard.
This method allows to determine infrastructure facility safety index that becomes
instrumental for decision making, considering different level of confidence for facility
failure rate.
QRA application to case studies for dam and bridge failure risk analyses, as well as
risk assessment for wind hazards are observed by Vanmarcke (2011), Uddin (2011) and
Frangopol and Messervey (2011). All approaches follow three main steps when
performing QRA methodologies:
 Operating risk assessment for underground metal mining systems 195

• probabilistic hazard analysis

• system vulnerability analysis
• potential consequences analysis as a result of the hazard occurrence.
The risk is expressed as product of hazardous event rate, vulnerability, and consequence.
The authors indicate importance of using risk-based methods for the design of
infrastructure facilities that allows to minimise the risk of potential failures and negative
monetary and non-monetary consequences in case if hazardous events occur. Moreover, a
risk-based design approach allows facilities for flexibility in maintenance action that is
significant part of safety risk mitigation strategy. Although safety engineering focuses on
the health and safety aspects of work, the likelihood and the monetary implications of
such risk assessment can provide significant input to operating risk analyses.

6.4 Flexible design and risk

Flexible designs enable system operators to respond cost effectively to changing
circumstances. As a result, system designers need to evaluate the value or foreseeable
situation developments and incorporate the ability to adjust designs and plans according
to the encountered conditions. The introduction of flexibility in design enables the
mitigation of downside risks and taking advantage of side opportunities by facilitating the
possibility for future changes in operating capacity, function and protection against
incidents by avoiding negative consequences (De Neufville and Scholtes, 2011;
Kazakidis and Mayer, 2010). The objective is to increase the expected NPV of a project
by limiting possible losses and increasing possible gains. For major mining projects
costing billions the combined value of flexibility in design can be worth hundreds of
millions. Therefore, a methodology is needed to create value in the planning of systems
by using the power of flexibility to deal with uncertainties and take advantage of them,
where this is possible. As suggested by De Neufville and Scholtes (2011), an examination
process includes the following four steps:
• recognise major inevitable uncertainties in long-term forecasts
• identify best suited system components to introduce flexibility
• evaluate alternative flexible designs
• plan their eventual implementation when certain conditions are encountered.
The value of flexibility is determined by comparing the NPVs of the flexible design
against the passive, inflexible, one:
Determination of the value of flexibility in design:
[Present value of flexibility] = [Flexible design NPV] – [Passive NPV]. (8)
This enables the evaluation of alternative designs by comparing the expected monetary
values, based on forecasted likelihood of circumstances and events. The process shifts the
forecasting effort towards understanding the process uncertainties as opposed to trying to
produce single value forecasts to avoid misleading valuation and ranking of alternatives.
Although financial options pricing is a conceptually appealing theory, it is typically not
suited for valuation of options in engineering design projects (De Neufville and Scholtes,
196 S.A. Kenzap and V.N. Kazakidis

2011). The required accuracy of a decision-making process is a reflection of the

forecasted uncertainty in mine project variables (Kazakidis and Mayer, 2010). Monte
Carlo simulation, cost-benefit, and options analysis, along with input from risk analysis,
are essential in assessing flexible alternatives and in determining the value of flexibility
in system design.

7 Discussion

Operating risk assessment for underground metal mining systems can be divided in two
stages: hazard identification and risk analysis. Risk identification method should be
selected based on the characteristics of a particular situation. The qualitative assessment
allows to determine hazardous factors and the qualitative analysis evaluates their negative
monetary or non-monetary consequences. Quantitative methods use numerical values of
factors to determine the value of risk. In order to assess probability of a risk event and its
influence on mining project economics, an expert should understand the economic impact
of this hazard and be able to assess it quantitatively. A cost of operating risk in a mining
system, which is determined as expected project NPV loss due to operating risks, is a
parameter that describes operating risk in DCF analysis. Risk factors that influence
likelihood of economic loss in a mining project can be divided in to: project internal and
external factors. Mining system operating risks (equipment, schedule, geomechanics)
belong to project internal risk factors.
Reliability, quality and safety engineering provide risk assessment tools that
can be used to assess the probability of risk events occurrence and the prioritisation at
identified hazards for underground mining processes. The assessment of failure
using historical equipment failure/maintenance data is widely used in reliability
engineering. Quality monetary loss due to poor technological process performance and
methods for prioritisation of failure risks are well developed in quality engineering.
Safety engineering uses FTA analysis that allows to quantify risks either in terms of
fatality rates, or probability of economic loss for engineering design alternatives.
Infrastructure engineering uses the Monte Carlo simulation-based quantitative risk
assessment approach that allows to determine probabilities of monetary losses and
fatality/injury rates due to natural hazards.
Expert-based stochastic mine operating risk evaluation methods that allow to
accommodate qualitative and quantitative DCF model data need to be developed to
adequately evaluate risks in underground metal mining systems. Using systematic
operating risks classification approach is critical for risk based planning and mine design
as it intends to investigate a complex production system that has a link to uncontrolled
factors like orebody geology. Moreover, mining projects are long-term business ventures
with significant pre-production period of mine construction and this presents another
challenge that benefits for risk based mine planning/design approach. Every mine needs
a unique plan through project feasibility studies, where the required information
to perform mine planning and design cannot be obtained through direct observations of
operations. Underground mining systems design, with a link to risk based
decision making, allows to perform risk-based mine planning and design by examining
technically feasible production system alternatives. This is achieved by considering all
the interrelated technological dimensions: geology, mining, processing. This approach
 Operating risk assessment for underground metal mining systems 197

allows to take into consideration strategic business goals of a mining company. This can
be done when an engineer has available limited initial information (e.g., geological block
model, maps, geographical data), by using casual analysis of complex technological
systems. Such systems require mine technological components (e.g., mining methods,
ore/waste handling, ventilation, etc.) that can be designed based on expert-based forecasts
of events that happen during the mine construction and production cycles.
Developing such expert-based risk design tools will allow to assess flexibility of mine
design alternatives that will lead to optimisation of process options selection. Moreover,
flexibility in mine design allows to increase the confidence that future mine design will
be able to adopt possible future changes in the business environment and meet overall
long-term corporate strategies. This task presents a number of operating challenges due to
the complexity of mining production system with interrelated factors that affect a bottom
line of the entire operation. These operating risk related factors include mining methods,
ore processing methods, mine annual production rate, mining sequence, and ore flow
with planned quality parameters from a production stope to the mill.

8 Conclusion

A risk classification for underground mining systems needs to be developed and link to
risk-based decision-making process in order to distinguish mining project risks between
macro- and micro-economic risks. This will allow the engineer to effectively perform
analysis of mining project economic risks, identify risk driving factors, assess risks
quantitatively, and develop sound risk management strategies. DCF-based decision
needs to incorporate operating risk by engaging both qualitative and quantitative
risk assessment methods that take advantage of existing risk engineering approaches.
A methodology that captures these two dimensions can provide interactive risk-based
decision making by incorporating relevant results from risk engineering analyses,
customised for the needs of a mineral resource project through qualitative and
quantitative assessments.

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